Asset Classes: Other Assets


Kerry Back

BUSI 721, Fall 2022
JGSB, Rice University

Real Estate

Many people have substantial real estate investments via home ownership or perhaps owning rental properties.

It is also possible to invest in real estate in the stock market via REITS (real estate investment trusts).

  • Equity REITS
  • Mortgage REITS

Or, you can diversify across REITS by investing in a REIT ETF.

Commodities

Metals - gold, silver, \(\ldots\)

Energy - crude oil, natural gas, \(\ldots\)

Agriculture - corn, wheat, \(\ldots\)

Individuals can invest in commodities through futures contracts, by investing in a managed futures fund, or through ETFs.

Futures Contracts

  • A futures contract is a commitment to buy/sell in the future at a pre-determined price (the futures price).
  • The futures price is determined in the market.
  • People who buy the futures make a profit when the futures price goes up.
  • People who sell it make a profit when the futures price falls.

Example

In July, you buy a soybean contract on the CME (Chicago Mercantile Exchange) for November delivery at a price of $15 per bushel.

A contract is for 5,000 bushels.

Suppose the price of the November contract rises to $17 in August and you sell the contract.

You made $17 - $15 = $2 per bushel on 5,000 bushels = $10,000.

Managed Futures

Managed futures funds buy and sell contracts based on market conditions and their projections of the market.

Usually the strategies are based on price momentum, hoping to ride price waves up or down.

If you invest in a managed futures fund, you are really investing in traders, not in commodities.

Commodity ETFs

Some commodity ETFs own the commodity - for example, some gold funds.

Others - for example, oil funds - hold futures contracts (they buy the futures so they profit if the futures price increases).

We’ll discuss the structure of futures-based ETFs in more detail later.

Currencies

You can invest in foreign currencies by buying futures contracts or through an ETF.

You can also bet on the dollar with futures contracts or through an ETF.

You bet on the dollar by betting against a foreign currency or a group of foreign currencies.

“Dollar bullish” ETFs are bets on the dollar.